Correlations in Gold, Oil and Dollar Value Index

The world has changed to what it was before the 1960s and it is continuously changing. Since the world recognized oil as the next gold and formation of OPEC in 1961, the way the dollar worked and oil responded changed drastically. The major turn around in the value of oil was seen after the 1973 oil embargo of the oil producing countries from around the world, which shook the entire base of world economics.

It was after this the major players in the world economics understood that oil it just not just a black liquid it is the black gold and the need for the survival of every country in the world. Where oil is the need for global economics, same is the case with gold being the need of every central bank of the world to buy gold in exchange of providing the open market with more currency and to balance trade imbalances in international markets. The US Dollar is no doubt the major player in the world regarding trade and forex exchange, but it is gold and oil that counter the weight on the other side of the global trade seesaw (Zvi Bodie; Alex Kane; Alan J Marcus, 2005).

The correlation of gold and dollar is a years old tradition for investments and a leverage to control currency devaluation. Investors around the world generally use gold as a tool to control the economic activities that go around the country and in international market. However, the main roots of gold standard for currency started with the beginning of central banking system. The correlation between gold and dollar can be understood by a simple fact that when there are more cash currency in the market, the people will be able to buy more precious metals. Gold being one of the most precious metals in the world and used as an investment, people always try to convert their cash into gold for better returns in the future. More paper currency at the disposal of the people will mean that the worth of that currency is low and people are able to buy more gold from that therefore causing the currency paid to get that amount of gold to rise. This means that dollar and gold have an inverse relationship. The market works more on the supply and demand system. The gold has been the center of attention as a precious metal since times immemorial and always in demand. Although there has been a lot of mining on the gold throughout the world but the demand never ceases. Just like any business, where people invest to get better returns with the expectation of the business to grow, gold has proven tendency to grow in cost over time. More currency in the market results in lesser gold available for purchase because of rise in competition therefore higher the price of gold (Ambrose Evans-Pritchard, 2010).

The price of oil in the international market results in inflation because of rising prices for production and transport therefore negatively effecting the price of the dollar. The price of dollar is affected because the consumers are not able to buy the products that are available in the market therefore demanding more currency in exchange of the products therefore decreasing the value of the currency. As the amount of oil production is reaching all time high and with the rise in industries resulting in increase in the demand of oil, the major oil consuming countries like USA, China and India have started to store oil as reserves. In exchange, these countries give out dollars to the oil producing countries, putting the same inverse impact as gold has on dollar. USA being the largest consumer of oil in the last 30 years, consumes almost 25% of the total oil production that is being drilled in the world to support the mere 5% of the global population. In return to get more oil, not only to use but for keeping it as reserves, the Americans are pumping dollars into the accounts of oil producing companies, therefore tilting the trade balance in their favor. India and China followed by many European countries follow the same lead therefore keeping the demand of oil on a consistent high. The rising demand of oil, in turn leads the OPEC countries to increase the rates that they get for per barrel of oil. The high demand in oil results in a lower price for the US dollar (Mahmoud A. El-Gamal, Amy Jaffe, 2009).

2006 2007 2008 2009 2010 2011
hi low hi low hi low hi low hi low hi low
Gold ($/oz) 641.3 513 843 645.4 1032 841.8 1195 865.77 1423.5 1044.65 1920.4 1307.4
Oil ($/Barrel) 64.88 59.9 68.85 65.35 77 71.3 90.9 83.45 113.28 74.9

USA and many of the European countries had been having the advantage of cheap oil quite a while now but starting from 1973 to recent years, the age of cheap oil is a long gone history. The price of oil has gone over $100 per barrel with the rise in its demand. There are many geopolitical and economic considerations that are to be accounted for while considering the supply and demand of oil and dollars in the global market.

The major change in the world trade came from 1975, when the OPEC countries agreed to sell oil in US Dollars therefore bringing the dollar in the main streamline of global economics. The central banks around the world and primarily of the OPEC member countries had to buy gold from the international markets to balance the trade imbalance that was began to tilt in the favor of dollar therefore bringing gold too in comparison of dollar. The price of gold was fixed at $35 per ounce and the price of oil per barrel was fixed to be US$3. When the oil producing countries started to balance the trade by buying gold, the price of oil and gold started to rise on a consistent basis. Although gold is not used as currency in the market, gold is put in reserve in place of the paper or metal currency that the bank issues. Gold has shown a consistent rise in the price since then, while oil and dollar have seen many sudden positive and negative surges in the past years (Zvi Bodie; Alex Kane; Alan J Marcus, 2005).

The peak of the disparity was seen when in June 2008, the price of oil reached all time historic high of 133.93 US Dollars per barrel and the Dollar index stood at 70.88. The February of 2009 saw the entire opposite of what happened in June, 2008 when the price of crude oil per barrel was $39.16 and the US Dollar rose in the in the international market went up to 85.17 in the trade index. The similar trend was again seen in the trend that started in November 2010 with the fall in the Dollar index in the global market and rise in the price of oil that went up to $110.04 per barrel in the market. Gold has however shown a consistent rise in the price due to rising inflation, declining worth of US Dollar in the international market because of the rise of several regional trade centers. China and have come ahead as major regional players of trade being the two of the top buyers of gold and oil from around the world forming a huge regional trade block (Ed. Wallace. 2008).

Gold, Dollar and Oil indexes from January 2005 to October 2011
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07
Dollar Index 81.6731 82.3893 85.5924 85.4705 84.1259 81.8198 81.5837 81.5361 82.5889 78.9729
Crude Oil ($/Barrel) 46.84 53.04 58.7 62.37 65.51 69.69 74.41 58.88 631.17 63.97
Gold ($/oz) 424.03 429.23 424.48 496.9 543.86 610.65 633.71 585.78 54.57 679.37
Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
Dollar Index 77.7295 72.7486 72.4942 70.8895 71.6608 82.8874 82.733 81.5681 75.0462 73.3577
Crude Oil ($/Barrel) 74.18 86.2 92.95 112.57 113.44 76.65 41.75 49.79 64.09 75.82
Gold ($/oz) 665.3 754.6 889.6 909.7 920 730.75 919.5 883.25 939 1040
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
Dollar Index 75.1373 75.8501 75.4314 72.1363 72.126 68.1937 68.3016 70.5181
Crude Oil ($/Barrel) 78.22 84.48 76.37 81.9 89.42 110.04 97.04 93.32
Gold ($/oz) 1078.5 1179.25 1169 1346.75 1327 1535.5 1613.5 1741

The correlation between oil, gold and oil is inversely proportional in all aspects, which the global trade history has shown. The dollar and gold relation is formed to balance trades between countries if other commodity is not exchangeable and by reserve banks that issue currency in exchange of gold. The relation of oil and dollar is on the fact that oil is sold in US Dollars in the global market. The central law that regulates these relationships is the basic demand and supply law that is applicable to any business in the world. With the price of gold on the gradual rise in the global markets, the devaluation of dollar in terms of trade is being seen across the globe. The effect of this was seen in the global trade with the shooting up of the prices of oil per barrel and steep fall in the price of Dollar resulting in global economic crises. Afterwards most of the countries and associations are forming units to bring their currency in global trade to decrease the dependency on dollar to avoid any future economic crashes.

Works Cited

Ambrose Evans-Pritchard. Gold reclaims its currency status as the global system unravels. The Daily Telegraph, 2010-06-20

Zvi Bodie; Alex Kane; Alan J Marcus. Investments. Boston, Mass.: McGraw-Hill Irwin, 2005.

Ed. Wallace. Oil Prices Are All Speculation. Business Week, June 27, 2008

Mahmoud A. El-Gamal, Amy Jaffe. Oil, dollars, debt, and crises. Cambridge University Press, 2009

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